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Type of Indicators in Technical Analysis – Stochastic Oscillator

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The Stochastic Oscillator is a momentum indicator. It is developed by George Lane in the 1950s that is based on a theory that prices moves in waves, moving back and forth between overbought and oversold levels.

In a chart where the stochastic oscillator is displayed, there are two lines which make up the indictor – the %K and the %D.

The %K line is usually shown as a solid or blue line while %D is shown as a dotted or red line.

When using the stochastic oscillator, there are 2 main levels to lookout for. One is the overbought level which is represented by 80 while the other is oversold level which represented by 20.

When %K or the %D line crosses above the 80 level, it is a bearish signal, which is a signal to enter into a short position.

When %K or the %D line crosses below the 80 level, it is a bullish signal, thus it is a sign to enter into a long position.

Stochastic Oscillator

The illustration above shows the stochastic oscillator. Whenever the lines crosses above the overbought (80) level, it is a signal to enter into a short position.

Whenever the lines crosses the below oversold (20) level, it is a signal to enter into a long position.

This technical indicator is one of the common used technical indicators among traders today. It is simple and provides a certain degree prediction of price direction as it identifies price turning points by comparing the closing price of a security to its price range.

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